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capital one Q3 2008 Capital One Financial Earnings Conference Call Presentation
 

capital one Q3 2008 Capital One Financial Earnings Conference Call Presentation

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    capital one Q3 2008 Capital One Financial Earnings Conference Call Presentation capital one Q3 2008 Capital One Financial Earnings Conference Call Presentation Presentation Transcript

    • Third quarter 2008 results October 16, 2008
    • Forward looking statements Please note that the following materials containing information regarding Capital One’s financial performance speak only as of the particular date or dates indicated in these materials. Capital One does not undertake any obligation to update or revise any of the information contained herein whether as a result of new information, future events or otherwise. Certain statements in this presentation and other oral and written statements made by Capital One from time to time are forward-looking statements, including those that discuss, among other things, strategies, goals, outlook or other non-historical matters; projections, revenues, income, returns, earnings per share or other financial measures for Capital One; future financial and operating results; and Capital One’s plans, objectives, expectations and intentions; and the assumptions that underlie these matters. To the extent that any such information is forward-looking, it is intended to fit within the safe harbor for forward-looking information provided by the Private Securities Litigation Reform Act of 1995. Numerous factors could cause our actual results to differ materially from those described in such forward-looking statements, including, among other things: general economic and business conditions in the U.S., the UK, or Capital One’s local markets, including conditions affecting consumer income and confidence, spending and repayments, changes in the credit environment, including an increase or decrease in credit losses or changes in the interest rate environment; competition from providers of products and services that compete with Capital One’s businesses; financial, legal, regulatory, tax or accounting changes or actions, including actions with respect to litigation matters involving Capital One; increases or decreases in our aggregate accounts or consumer loan balances or the growth rate or composition thereof; the amount and rate of deposit growth; changes in the reputation of or expectations regarding the financial services industry and/or Capital One with respect to practices, products or financial condition; the risk that synergies from Capital One’s acquisitions may not be fully realized or may take longer to realize than expected; disruptions from Capital One’s acquisitions negatively impacting Capital One’s ability to maintain relationships with customers, employees or suppliers; the risk that the benefits of Capital One’s cost savings initiatives may not be fully realized; Capital One’s ability to access the capital markets at attractive rates and terms to fund its operations and future growth; losses associated with new or changed products or services; Capital One’s ability to execute on its strategic and operational plans; any significant disruption in Capital One’s operations or technology platform; Capital One’s ability to effectively control costs; the success of Capital One’s marketing efforts in attracting and retaining customers; Capital One’s ability to recruit and retain experienced management personnel; changes in the labor and employment market; and other factors listed from time to time in reports that Capital One files with the Securities and Exchange Commission (the “SEC”), including, but not limited to, factors set forth under the caption “Risk Factors” in its Annual Report on Form 10-K for the year ended December 31, 2007, its Quarterly Report on Form 10-Q for the quarters ended March 31, 2008, and June 30, 2008, and its current report on form 8-K filed September 24, 2008. You should carefully consider the factors discussed above in evaluating these forward-looking statements. All information in these slides is based on the consolidated results of Capital One Financial Corporation, unless otherwise noted. A reconciliation of any non-GAAP financial measures included in this presentation can be found in Capital One’s most recent Form 10-K concerning annual financial results, available on Capital One’s website at www.capitalone.com in Investor Relations under “About Capital One.” 2
    • Third quarter 2008 highlights • Diluted EPS of $1.00; EPS from Continuing Operations of $1.03 – Continuing Ops EPS down $1.06 from Q307, driven by higher provision expense – Continuing Ops EPS down $0.21 from Q208, driven by higher provision expense, partially offset by higher revenue and lower expenses • Credit performance in the quarter largely in line with prior expectations – Managed chargeoff rate up 15bp from Q208 to 4.30% – Managed delinquency rate up 35bp from Q208 to 3.99% – Built allowance by $209 million; consistent with outlook for $7.2 billion in managed charge-offs through Q309 • Balance sheet and diversified funding remain sources of strength in a volatile market – Opportunistic issuance of common stock and continued internal capital generation adding to excess capital; TCE ratio up 29bps to 6.47% – Immediately available liquidity of $32B – Average deposits increased $6B from Q208 to $95.3B; average cost of deposits declined 6 bps 3
    • Margins improved slightly in the quarter Margins as % of Managed Assets Q308 Drivers 12% Revenue Margin • Higher fees as early stage delinquencies rose 10% 9.48% • Seasonal impacts on fee recognition 9.38% 9.12% Risk-Adjusted Margin 8% 7.37% 6.43% 6.22% • Lower cost of funds Net Interest Margin 6% 6.19% 5.70% 5.86% • I/O strip write-down of $67M 4% • No material one-time items 2% 0% Q207 Q307 Q407 Q108 Q208 Q308 4
    • We continue to drive efficiency gains Efficiency Ratio 60% 50% 48.6% 44.2% 42.6% 40% 30% Excluding Visa one- time impacts 20% 10% 0% Q207 Q307 Q407 Q108 Q208 Q308 5
    • Credit metrics continues to perform in-line with expectations Monthly Managed Net Charge-off Rate 8% Q308: Bankruptcy 5.85% 6% Filing Spike National Lending 4% Q308: Local Banking 2% 0.46% 0% Ja n -0 0 Ju l-0 0 Ja n -0 1 Ju l-0 1 Ja n -0 2 Ju l-0 2 Ja n -0 3 Ju l-0 3 Ja n -0 4 Ju l-0 4 Ja n -0 5 Ju l-0 5 Ja n -0 6 Ju l-0 6 Ja n -0 7 Ju l-0 7 Ja n -0 8 Ju l-0 8 Monthly Managed Delinquency and Non-Performing Loan Rate 8% Q308 National Lending 6% 5.43% 30+ Delinquency Rate 4% Local Banking: Q308 Non-performing loans 2% 0.96% as % of loans 0% Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 6
    • Allowance coverage ratios remain high National Lending Segment Allowance as % of Reported 30+ Quarterly Highlights Delinquencies 200% • Increased allowance for loan 172% losses by $209M to $3.5B 167% US Card 147% 150% • Allowance consistent with 149% International outlook for $7.2B in managed 123% 133% charge-offs over next 12 months 100% • Allowance as % of reported 30+ delinquencies declined due to: 57% – Higher proportion of early stage Auto 43% (more collectible) delinquencies 50% – Seasonality 47% 0% Q207 Q307 Q407 Q108 Q208 Q308 Allowance as % 2.3% 2.4% 2.9% 3.3% 3.4% 3.6% of Reported Loans 7
    • We remain well above our capital targets Tangible Common Equity to Tangible Quarterly Highlights Managed Assets Ratio • Issued approximately $750M of common 8% stock 7% 6.47% 6.33% 6.18% • TCE ratio increased due to retained 6% Target Range earnings growth and stock issuance 5% 4% • Tier 1 risk-based capital ratio of 11.9% (estimated) 3% 2% 1% 0% Q207 Q307 Q407 Q108 Q208 Q308 8
    • We continue to maintain ample liquidity Q308 Highlights Readily Available Liquidity $B • $5.7B Holding company cash covers parent obligations for 2+ years, including dividend 35 $32B • $32B of readily available liquidity is 4x next 12 Undrawn FHLB months of debt maturities 30 Capacity – $7.8B of debt maturities in the next 12 months 25 – Long funds position – No overnight funding or repo Undrawn 20 Conduit • Funding in quarter was principally deposits – $6.5B net deposit growth 15 • $7.2B in undrawn FHLB advance capacity Unencumbered 10 Securities • $7.8B undrawn conduits: 3 year deals, staggered maturities, backed by strong commercial banks 5 – Renewed $5.3B during Q308 – $3B maturing in 2009 0 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 Q208 Q308 • $16.7B unencumbered securities in $27B investment portfolio (97% rated AAA) 9
    • Our conservative investment portfolio is a foundation of our strong balance sheet What is in our $27B investment portfolio • 65% Agency MBS: Guaranteed pass-throughs and CMOs Q308 Investment Portfolio Mix • 13% Non-Agency MBS: – Mostly AAA rated, prime jumbo collateral FHLB/FED – More than 2/3 super senior credit enhancement Stock Other ABS CMBS Non-Agency 3% 2% – Less than 1% backed by subprime/Alt-A 9% 4% Treas/Agency MBS 4% • 9% AAA-rated ABS: Credit card, auto and student loan 13% • 4% Treas/Agency: Predominantly GSE debt issued by Freddie, Fannie and FHLB • 4% CMBS: Short senior structures backed by strong collateral • 3% FHLB/FED Stock: Required holding to access Fed and Agency MBS FHLB lending facilities 65% • 2% Other: Predominantly municipal securities What is not in our investment portfolio • No SIV’s, CDO’s, leveraged loans • No exposure to equity or hybrids • No securities backed by Option ARMs 10
    • Capital One delivered an operating profit of $386M despite increasing headwinds Net Income from Continuing Operations ($Millions) Q308 Q208 Q108 Q407 Q307 National Lending US Card $ 345.0 $ 340.4 $ 491.1 $ 498.7 $ 626.8 Auto Finance 14.5 33.6 (82.4) (112.4) (3.8) International 12.1 33.7 33.3 54.7 47.4 SUBTOTAL 371.6 407.6 442.0 441.0 670.5 Local Banking 88.2 67.1 75.8 103.6 195.5 Other (74.0) (12.2) 114.6 (223.0) (49.6) Total Company 385.8 $ 462.5 $ 632.6 $ 321.6 $ 816.4 $ 11
    • Our US Card business continues to deliver profits and generate capital despite a deteriorating economic environment US Card US Card Revenue Margin and Non-Interest Credit Risk Metrics Expenses as a % of Average Loans 20% 8% Managed Net 17.31% Charge-off Rate 16.42% 16.42% 7% 6.26% 15.42% 6.13% 14.96% 5.85% 14.67% 15% 6% 4.84% Revenue Margin 5% 3.85% 3.56% Non-Interest Expenses as a 10% 4% % of Average Loans 4.20% 4.28% 3.80% 4.04% 3% 3.85% 2.98% 2% 5% Managed 30+ 5.88% 5.81% Delinquency Rate 5.76% 5.09% 5.48% 5.38% 1% 0% 0% Q207 Q307 Q407 Q108 Q208 Q308 Q207 Q307 Q407 Q108 Q208 Q308 12
    • We’ve retrenched and repositioned our auto business for resilience Auto Loan Originations Credit Risk Metrics and Managed Loans ($B) 10% $4.0 9% Managed 30+ $3.6 Delinquency Rate 9.32% $3.5 8% $3.2 $3.0 7.84% 7% $3.0 7.62% 7.15% $2.4 6% $2.5 6.42% 6.00% 5% $2.0 5.00% 4% $1.5 $1.4 3.98% $1.5 4.00% 3.84% 3% 3.56% Managed Net $1.0 2% Charge-off Rate 2.35% 1% $0.5 0% $0.0 Q207 Q307 Q407 Q108 Q208 Q308 Q207 Q307 Q407 Q108 Q208 Q308 Total Outstandings ($B) $22.3 $24.1 $24.3 $25.1 $24.6 $23.4 13
    • In the most turbulent banking environment in a generation, our Local Banking business continues to manage credit exposures and grow deposits while maintaining pricing discipline and margins Local Banking Credit Risk Metrics Deposit and Loan Portfolio ($B) $80 5% $75.0 $74.2 $73.4 $72.8 $73.1 $70 4% Deposits $60 $50 Non Performing Loans 3% $44.7 $44.2 $44.3 $44.0 as a % of Loans $42.2 $40 Managed Net 2% $30 Charge-off Rate Loans 0.96% $20 0.81% 1% 0.56% 0.41% 0.27% $10 0.19% 0.46% 0.29% 0.31% 0.34% 0.19% 0.20% $0 0% Q307 Q407 Q108 Q208 Q308 Q207 Q307 Q407 Q108 Q208 Q308 14
    • We expect sound operating metrics in 2008, despite increasing credit headwinds Commentary 2008 Outlook Loan/Deposit Low single-digit decline in ending loans Flat average loans Double-digit growth in ending deposits High single-digit growth in average deposits Growth Revenue Low-to-mid single digits Modest decline expected in Q4 revenues due to seasonality Growth and Prime/LIBOR risk Low-to mid-40%’s efficiency ratio Cost Revenue trends will drive efficiency ratio -- Q4 efficiency 2008 OpEx around $6.2B ratio expected to trend higher Management Credit Continued economic weakness Allowance at 9/30/08 consistent with outlook for $7.2 US Card charge-off rate around 7% for billion in managed charge-offs over the next 12 months Expectations Q408 Capital Continue $0.375 quarterly dividend TCE ratio above 5.5-6.0% target No share repurchases until economic outlook improves Management 15
    • Despite continuing economic headwinds, Capital One remains well positioned to deliver value through the cycle Strong Position Decisive Actions • Resilient businesses • Pulled back on loan growth across all businesses • Conservatism imbedded in underwriting – Tightened underwriting decisions – Recalibrated underwriting models and • Strong balance sheet approaches – Substantial and growing deposit base • Retrenched and repositioned Auto Finance – Broad funding flexibility • Pulled back or exited least resilient businesses – Fortified liquidity • Increased collections intensity – Strong capital position • Aggressively managing costs • Raised equity capital from a position of strength 16